How on Earth? … #ESGLalaland Obfuscation … Third Way Solutions
Edition 11 | February 2022
Another chock-full Lighthouse Keeper at a day after Europe went into deep shock as Russia declared war on Ukraine! Quite hard to focus attention on anything else, but I’ll try…
We start with a bit of grounding, and what’s better than doing that with a summary of some the global reports that typically land on our desks between early January and early February and that aim at explaining the state-of-the-world to us. This is followed by some new and continued obfuscation in #ESGLaLaLand: from ESG Funds that are thrown out of listings, climate commitments that are way beyond delivery, and continued financing of oil and gas by ESG champions, or huge amounts of subsidies given to oil and gas by governments that demand corporations to be more sustainable. As always, I can’t spare you the pain that the #ESGLaLaLand turmoil creates, but not without ending with solutions to return to the necessary pathway towards ‘true’ sustainability and regeneration. A ‘third way’ is needed to end the constant dualism, so that we actually have a chance to solve our global problems and as long as we don’t allow mad dictators to write the playbook for human destiny.
How on Earth …?
The beginning of each year sees the release of multiple reports that describe the ‘state of the world’ we’re in from various perspectives, and that’s indeed helpful as necessary grounding and a reminder to act humble and focused at the same time, as the remaining timeframe is short. I normally gather about a dozen reports, and some are worthwhile mentioning in context to each other, one thing that the single reports don’t do as just containers of certain topics, while we all know everything is connected, right?
The year normally starts with the WEF Global Risks Report, that this year presents a different format than in earlier years. It has always been a starter into a new year, and this year isn’t different.
It is probably not surprising that 84.2 % of the interviewees are concerned or worried about what’s happening TO us (and only BY us) on this only planet we have. Environmental concerns are 5 out of 10 of the globally biggest risk, and the remaining 5 are either consequences of the first five or are causing them (every $ or € newly created debt also has an environmental debt consequence, hardly anybody recognises).
I particularly like the root cause to symptoms analysis (or risk effects) of these most important risks and how they play out, underscoring how connected this system and the balance between nature and humans is.
One may wonder that given that complex symptoms and root cause system we’d make more progress on some of the important topics, e.g. making our resource use more circular. That’s where the Global Circularity Report of Circle Economy shows a sober picture: the amount of circular resources drops! Yes, you read this right, it drops, from more than 9% (which all thought would be a mark to sky-rocket over a decade or so), it decreased to 8.54 % in 2021. From 100,6 Gt of resources entering the global economy, only 8.6 Gt make it into circular processes.
The report explains: ‘Of the total material inputs, a hefty chunk (48 billion tonnes) went into long-term stock: largely buildings, infrastructure and heavy machinery. From that same stock, 17 billion tonnes of materials were removed or demolished, leaving a net addition of 31 billion tonnes in the year. The materials used for this stock are locked-in and won’t become available for cycling back into the economy until the stock reaches its end-of-usephase. In terms of the short-lived products that were consumed by the global economy—think of everyday items like clothing or packaging—a large share remains unaccounted for and is assumed to be dispersed into the environment as unrecoverable waste. In total, 32.6 billion tonnes of materials are collected as waste. The majority of this stream, 23.9 billion tonnes, is lost; it is landfilled, incinerated, wasted at mining operations or otherwise dealt with informally and “off the books”. Of the materials classified as waste, only 8.65 billion tonnes, or 8.6% of the total material use of society, is actually cycled.’
This shortcoming, further eroding our resource basis as part of the global ‘Commons’, is also accompanied by the insights of the Global Commons Stewardship Index Report, giving us a good view of the erosion of other nature categories and how they are diminished by human activity in an externality-ignoring economic system. The 2021 Index provides a scorecard for 100 countries on how well they are impacting the Global Commons both within their borders and through imported goods and services. The report concretizes this country-by-country, offering another sobering fact: the stocks and their trajectories are deep red up to purple (you know these colors from the COVID visuals, so you know what they mean). The key findings include:
- Major transformations are urgently needed in all countries to address negative impacts on the Global Commons generated by unsustainable production and consumption.
- Rich countries generate the largest share of the international spillovers that need to be addressed.
- Ambitious actions to protect and restore the Global Commons domestically and internationally must go hand-in-hand with efforts to improve living standards everywhere.
- G20 countries bear a special responsibility in reforming the governance of the Global Commons.
- Persistent data gaps and limitations should be addressed for more real-time and forward-looking monitoring of countries’ impacts on the Global Commons.
Switching to the people side, the World Inequality Report is telling. The report shows both root causes and effects of the damage we create as humanity, lead by highly networked rich individuals and ineffective governments, caused by the lack of appropriate governance. The collage of four visuals shows this: global income and wealth inequality shows the immense accumulation of income and in particular wealth at the top 10%. Since the 1820’s the share of global world income at the bottom 50% of global population has actually decreased, while it increased at the top 10%, with wealth skyrocketing, especially at the top 0,001%. And that directly related to the emissions sources, with 48% at the top 10% and 17% at the top 1 % alone. Inequality on all levels, not just income and wealth (there are many more categories) cause environmental damage, and environmental damage increases inequalities, a downward spiral.
None of what is shown here is totally new, but the interplay of root causes and symptoms is, and could lead to more integral problem-solving capacity.
Siloe’d solutions don’t help, integral solutions are needed. That’s why we at r3.0 have designed and developed the ‘Work Ecosystem’ with 9 integral Blueprints.
All of them are necessary to tackle any of our global problems: business models, transformation, accounting, reporting, sustainable finance, system value, education and funding governance. No wonder we haven’t erased climate change and poverty in 40 years time. There is no integral approach to problem-solving.
What are carbon pledges worth?
No month without new and revealing facts about the turmoil that pure ESG creates. The Corporate Climate Responsibility Monitor 2022 assesses the climate strategies of 25 major global companies. It critically analyses the extent to which they demonstrate corporate climate leadership. While just a snapshot, it still tells a story about what to expect from the rest. And the result is … concerning.
A Financial Times headline summarises: ‘Net zero plans by some of world’s biggest companies accused of falling short – Analysis of corporate carbon-cutting pledges says most targets lack integrity’. The article carries on: ‘Twenty-five of the world’s biggest companies with “net zero” targets plan to cut absolute emissions by only 40 per cent on average, according to a new report that highlights the complexity surrounding voluntary corporate emissions targets. Unilever, Nestlé, BMW, Eon and Accenture are among multinationals listed as having “low integrity” climate targets in the analysis released on Sunday by European NGOs the NewClimate Institute and Carbon Market Watch. Of the 25 companies evaluated in the Corporate Climate Responsibility Monitor report — which represent 5 per cent of all greenhouse gas emissions globally and have combined annual revenue of $3.2tn — half were found to have no absolute emissions-reduction goal for their “net zero” target year. “There is not sufficient regulation or accountability for these companies, they have a free pass essentially”, said Thomas Day, lead author and founding partner at the NewClimate Institute.’
The Corporate Climate Responsibility Monitor report offers this visual:
The FT article then also takes another spin: ‘The report was critical of the Science Based Targets initiative, which awarded certification of “1.5C compatible” emissions targets to 16 of the 25 companies, saying there were “loopholes” in the certification process.’ The BBC and many others covered the report as well.
This triggered my r3.0 colleague Bill Baue to remind folks of his formal complaint to the Science-Based Targets Initiative in a Linkedin post, and days later publishing a brilliant summary of where things stand one year after he made his formal complaint, called ‘Necessary Remedies to SBTi’s Betrayal of the Public Trust.’ The Wall Street Journal then picked it up as well. A very recommended set of reading materials!
What are ESG fund labels worth?
Another issue that resurfaced this month was triggered by Morningstar’s delisting of more than 1.200 ‘ESG Funds’, the Financial Times reports in their article ‘Morningstar cuts 1,200 funds from “sustainable” list – Data provider dropped products with combined $1.4tn in assets after finding “ambiguous language” in legal filings’. Further: ‘Finding common ground on what constitutes green or sustainable investments is a serious challenge for asset managers. Some believe it is best to avoid parking money with oil companies, for example, whereas others think it is better to invest, and to use shareholdings to press for change. In addition, regulators in the EU and elsewhere are conscious of the risk of so-called greenwashing, where funds make green promises that they cannot keep.’
Bloomberg reports that ‘Morningstar hasn’t yet put a precise dollar figure on the scale of the correction. It estimates that the sustainable fund universe was roughly $1.2 trillion smaller in the fourth quarter than in the third, after stripping funds of their ESG tag.’
The same article also describes Article 8 of the EU SFDR to be one reason of the problem: ‘There are currently about $4.05 trillion in assets being classified by the industry as Article 8 or Article 9 funds, Morningstar estimates. But the “lack of policy guidance” on how to define Article 8 funds has created “confusion and greenwashing concerns,” it said in a recent report. European authorities have acknowledged that there’s a need to revisit some of the definitions currently guiding SFDR allocations. The European Commission said in October it is planning to introduce minimum standards for Article 8 funds in an effort to fight greenwashing.’
Harald Walkate, a known expert in sustainable investment circles then also concludes: ‘The significance of labels is extremely limited. There are many labels out there, with different standards, which is confusing to the customer. Also most labels are pretty easy to get, as long as you pay. And then there are new ‘labels’ in the form of Sustainable Finance Disclosure Regulation (SFDR) classifications Article 8 and 9 – those are actually free (even though you have to disclose a lot of information on those funds but that’s doable for most large asset management firms) and the requirements for when you can opt for Art. 8 or 9 are relatively light. In other words, yes, there are a lot of funds out there that have some ESG label or indicator on it, but the asset manager will have a hard time showing “what’s ESG” about the fund, and indeed many of these funds will be basically undistinguishable from conventional funds.
What is ESG worth at all?
In the light of the trends described through reports above and the obfuscation of the ESG instruments (reports, rankings, listings, and even regulation) it is not a big surprise that ESG often stands for degeneration instead of regeneration. Two examples:
- The Guardian reports: ‘Harmful subsidies: why is the world still funding the destruction of nature? Government-financed support in sectors including agriculture, fossil fuels and water is incentivising the annihilation of the natural world. But reforming the system is politically fraught’ is a headline that couldn’t be clearer. ‘New research reveals at least $1.8tn (£1.3tn) of environmentally harmful subsidies is heading in the wrong direction every year, financing the annihilation of wildlife and global heating through support for cattle ranching, pesticide use, the overproduction of crops and fossil fuel extraction.’ This is further substantiated by a second article.
- In a separate article the Guardian reports: ‘Europe’s biggest banks provide £24bn to oil and gas firms despite net zero pledges – Investments to drill new oil wells and tap gas reserves were made within a year of signing up.’ The article explains: ‘Banks have acknowledged that they have an important role in the transition away from fossil fuels, and last April many signed up to the United Nations-backed Net-Zero Banking Alliance (NZBA), which requires they set targets to reduce carbon emissions. However, analysis by campaign group ShareAction showed that 25 banks that signed up to reduce emissions have provided $33bn (£24bn) in loans and other financing to 50 companies with large oil and gas expansion plans. The oil companies include America’s ExxonMobil, which has tried to defy shareholder demands to cut emissions, state-owned oil company Saudi Aramco and London-listed Shell and BP who have made huge profits from gas price increases in recent months. Since 2016, the European banks have provided financing worth $406bn. […] More than half ($19bn) of the financing since the net zero agreement came from four of alliance’s founders. They were London-headquartered HSBC and Barclays, France’s BNP Paribas and Germany’s Deutsche Bank. HSBC, Barclays and BNP Paribas also provided the most finance to these companies since 2016, at $59bn, $48bn and $46bn respectively.’
All of the players mentioned and involved here produce ESG Progress Reports (I am purposefully avoiding the term Sustainability Report), all have ESG Rankings and are buying other ranking products for their investments. So, how to answer the question of this sub-chapter ‘what is ESG worth at all?’
Clearly, pure ESG is just prolonging ‘same, same, same’, unable to add to any radical turnaround, and is even misused to cover up ongoing degeneration. BUT, and here’s the big but, it is still necessary when connected to thresholds & allocations, as they put performance into context, and finally allow to say ‘when is good… good enough.’
None of that is new either, I advocate for that since I helped to create the ‘Sustainability Context Principle’ at GRI in 2002 for G2 (and again in 2006 for G3). Twenty years lost due to just pure ESG, and just now it seems the ‘relativists’ got enough under pressure to potentially move forward.
We are reaching and era of Tipping Points, on all levels, on all fronts. For about a decade now r3.0 has worked on a Work Ecosystem of Blueprints, helping to complete a full picture of necessary transition recommendations, in in total 9 Blueprints. It is – as far as we can tell – the most developed ‘simultaneous leapfrog’ of a mental mindset and information infrastructure necessary for a regenerative and distributive economy. It aims to avoid dualism as an unhealthy way forward, and opens up new corridors, and as we pride ourselves with being ‘pre-competitive and market-making’, we think of calling the recommendations ‘third ways’. But even these third ways as an invitation to engage openly and in public are difficult for many, especially for the hardliners in #ESGLaLaland and those whose business models depend on incrementalism and just ‘steps in the right direction.’ It can get loud, sometimes unfair, and even ridiculous when (quasi) ad-hominem accusations enter the range of expressed discomfort. And as a consequence, others look at these discussions and start calling it a ‘fight’ or a ‘war.’
A pattern is visible: Most ESG players, when corrected for factual flaws (some even many times) deny, ignore, cocoon, and finally just defend, sometimes with unacceptable means. With few exceptions, they never play, even when an eye-to-eye dialog is offered, publicly and fully transparent.
What they simply don’t (want to) understand is that they’re not asked to stop with ESG, but allow science and ethics to set the necessary ‘guard rails’, so to add to sustainability when ESG is set into context. Does that sound like an acceptable third way? For me it does!
There is no fight, there is no war, it’s just a major cognitive dissonance that needs to be dissolved, a fear that needs to be taken away, a success story that needs to be told, a discussion on the same eye-level. That’s all that’s needed. At r3.0 we offer these third ways since the day we started. The r3.0 Blueprints, the r3.0 Transformation Journey Programs, the r3.0 yearly conferences, the r3.0 Test Labs, have been created for that. But no, ESG hardliners mostly don’t play. They continue to ignore all the great stuff that’s offered and say that the critiques don’t offer solutions. They couldn’t be more wrong.
What this shows to me is rather simple: as humans we have waited far too long to smoothly solve our global problems. Time has now run out for many of our problems, and they need quick salvation.
The solutions are there, but should we wait for those that don’t want to play? I think we shouldn’t, but be very clear on what’s necessary, and work with the coalition of the willing.
I personally believe much more in Tipping Points than waiting for a certain ‘mainstream’ to come to grips. They will come as followers, as they simply have to. Choices are binary! Which part of history do you want to be on? At r3.0 we have chosen sides, and all that want to explore this side are more than welcome.
Note: some of you subscribers will recognise that the above is motivated by the open dispute between my r3.0 colleague Bill Baue (and others) and Harvard Business School Professor Bob Eccles, who has chosen to cocoon after massive critique about his constant conflation of ESG ‘as if’ it was sustainability. For those who are interested in what was called into question should read Bill Baue‘s three Linkedin articles here (Open letter to Prof. Eccles and ISSB) and here (Does simplification require misrepresentation?) and here (Misrepresentation as a Strategy – The Weaponization of Logical Fallacies). What we can all learn from this case is how standard setters are using the same tactics institutionally, while the world depends on them. Bill Baue delivers the case studies that will make it into the training manuals of future leaders. May we all learn from them, and may standard setters learn from them too at this decicive moment for humanity!